Association for Public Policy Analysis & Management

Since the Great Recession, declining revenues and increasing needs for public goods and services has become a growing concern for municipalities which serve as a key provider for citizens’ local services. In this sense, local governments’ ability to sustain a healthy fiscal structure and meet service obligations is critical to avoid financial hardships and relieve tension between public administrators and citizens, especially when facing recessions. Financial condition generally reflects a government’s capacity to meet both short/long-term and service obligations. Although a large body of literature is dedicated to measuring financial condition (e.g., Clark & Ferguson, 1983; Ladd & Yinger, 1989; Brown, 1993; Groves, Valente, & Nollenberger, 2003), few research empirically examines the factors that affect government financial condition. Moreover, although substantial research investigated financial conditions of states or cities (e.g., Wang, Dennis, & Tu, 2007; Kioko, 2013; Hendrick, 2004; Sohl et al., 2009), studies using government-wide statements for purposes of financial condition assessment are very limited in the literature (Maher & Deller, 2013).

To fill this void, this research will develop an empirical model to explore factors affecting government financial condition measured by 11 financial indicators in the four dimensions: cash, budget, long-run and service-level solvencies (Groves, Valente, & Nollenberger, 2003; Wang, Dennis, & Tu, 2007). As the solvencies are related to different characteristics of government’s internal fiscal structure and external fiscal and political environment (Groves et al., 2003), this model will focus on one of institutional factors—tax and expenditure limitations (TELs) on local governments. The financial condition data sets are manually collected from the Comprehensive Annual Financial Reports (CAFRs) of 100 largest American cities from FY 2007 through FY 2012, which includes periods before, during, and after the great recession in 2008. I also incorporate the Fiscal Policy Space dataset created by University of Illinois at Chicago (UIC) as another important source. Besides, I collect data from other sources, such as the U.S. Census Bureau’s Census of Government, American Community Survey, and U.S. Bureau of Economic Analysis. The dependent variables are the four indices of cash, budget, long-run, and service-level solvency, and the primary independent variable is the stringency index of state-imposed TELs on local governments. As cities are nested in states, the effects of TELs may vary by different states. A multi-level panel regression analysis will be utilized for the model estimation.

This research will be one of the very first attempts to measure fiscal condition and test TELs’ impacts on overall financial condition using government-wide financial statement data at the municipal level. Besides academic contributions, this study will provide insightful implications for practitioners and policymakers to manage municipal fiscal condition. Understanding different factors’ influences on municipal financial condition can guide local officials to be more cautious and prudent and try to avoid the negative effects when making financial policies. In addition, the expected research findings will help state and local policy-makers devise sound strategies to copy with municipal fiscal stress, reform harsh state and local fiscal institutions, and improve the long-run fiscal sustainability of municipalities.